Moderate or intense low-oxygen dilution (MILD) combustion is a promising combustion technology widely recognized by the international combustion community. In this study, numerical simulation was used to investigate the effects of CO2 atmosphere on MILD combustion of propane in a 20 KW furnace. The results show that the O2/CO2 atmosphere leads to a lower average temperature in the furnace, better temperature uniformity, and more uniform distribution of OH and CH2O compared to MILD combustion in N2/O2 atmosphere. Propane MILD combustion is established well under the physical and chemical effects of CO2. An analytical approach is proposed to describe the physical and chemical effects of CO2 on MILD combustion. The physical effect of CO2 shortens the ignition delay time and advances the pyrolysis and ignition of propane, which causes a high-temperature zone in the front furnace and reduces the temperature uniformity in MILD combustion. However, the chemical effect of CO2 dominates the establishment of the MILD combustion by increasing the ignition delay time and reducing burning rates, with the help of the physical effects of CO2 by intensifying the entrainment in the furnace. Thus, the overall effects of CO2 lead to enhanced temperature uniformity by enlarging the area and evening the temperature of both the ignition zone and combustion zone. These findings provide valuable insights into the physical and chemical mechanisms of CO2 in MILD combustion and have important implications for optimizing combustion processes for improved efficiency and reduced emissions.